What Automation Can Mean for the Restaurant Industry

Labor costs are a major expense item for restaurants, and many companies are already turning to automation to boost profitability and improve customer service.

In this episode ofIndustry Focus: Consumer Goods,the team considers the big picture implications and timeline for when such technology may lead to job losses and significant shifts for the industry. On the flip side,they also discuss how service could become a feature of higher-end establishments, something that can differentiate competing brands.

Vincent Shen: For our finaltopic of the day,getting more high-tech, is the idea --and this is something that I think we had somepretty fun discussions about in the past -- of fast food workers going away. I thinkwe can't deny that calls for higherminimum wages or something that you seequite often in headlines. Even here in the D.C. region, the cityrecently approved a $15 minimum wage that willgradually reach that level by 2020 in the city. From what I could find for theindustry at a McDonald's,labor costs are a very significant piece of their cost structure,usually around 20% to 25% for these chains. What do you think? Howdo you think this is going to mold things?

Dan Kline:There'sgoing to be two phases of this. Thecurrent phase we're in now is Starbucks,Panera, Dunkin' Donutsthat are using technologynot to take employees out of stores,but to make stores more efficient.Chipotleis starting to do that. TheChipotle order app,where you can mobile order and pay, they're runningseparate lines. The line you see atthe front of the Chipotle where the person makes your food,in the back, there's another one of those. So, they'renot necessarily firing employees,or using less people in stores. They're putting more people into production.

That'swhat Starbucks is doing. So,instead of somebody having to take your orderin the line, they're making your drink,so people go through faster,the store serves more people. That's phase one. Phase two,you're going to start seeing the McDonald's of the world that have bigkitchens and don't need extra production help, they'regoing to start putting ordering in kiosks, and that is going to take their head count down. They'redoing that all across Europe and Canada. So,whereas there might be four or six cashiers, there might be 12 kiosks with one or two employees who are helping you through that,and maybe there's an extra customer service personfacilitating the process. And then,eventually, you're going to start to see, at the wealthier fast food chains, maybe fries atMcDonald's won't be made by human being. Maybe your Big Mac still will bebecause it's customizable and there's a lot to go into it. But, you'regoing to see less labor.I don't see any way around that.

Shen:Sure. Youbring up a really good point.It'll be very much a gradualtransition. Some of the examples you brought up in aMcDonald's with some of the self ordering kiosks, very popular, thePanera Bread we have across the street from Fool HQ here,also a similar situation, I think there's five or six tablets ready to go. Ithelps them turn down the staff.

Kline:Andthis has been happening for 20 years.I'm a slight bit older than you,and when I was a kid and you went to McDonald's and you ordered aCoke,someone poured a Coke. Now, most McDonald's haveCoca-ColaFreestyle machines,where not only do I have an enormous amount of choice --I can get diet vanilla root beer andmix it with Fanta orange if I want --all the person at the counter has to do ishand me a cup. So,this labor has been coming out of the fast food process inlittle ways for a long time. Andyou will start to see service being a premium,meaning Starbucks'willingness to have a person make your drink exactly the way you want it,where is Panera Bread just hands you acoffee cup, that's going to be a differentiatorfor some of these brands. So you may see fast casual concepts double down on people and actually charge more for the experience of getting your pizza not made by a robot pizza machine.

Shen:Lookinga little bit further ahead,we have some pretty big names in Silicon Valleyworking to develop better AI,better automation. Obviously,it seems like a very natural next step for that technology to beintegrated more and more into this industry, as we'vediscussed here.I guess I want to talk a little bit about some examples of some of the more high-tech stuff,still very much in the testing stages. One, I found that, for acompany we talked about just a few minutes ago with Domino's, this made me chuckle, they have their DRU, the Domino's Robotic Unit,which is essentially anautomated vehicle --but not a full size car. It has the capacityto hold as many as 10 pizzas in a heated compartment. It can handledeliveries within a 20 mile radius on a single charge. They'realready testing stuff like this.I think it's limited to New Zealand and Australia right now. They'vealso handled some issues with theft, withsecurity cameras, with the locked compartment. But it is, to me, aglimpse of the possibilities.

Kline:I thought you were going five years after thatin the future, where pizza robots are overlords.[laughs] Domino's has been very goodabout what I'll call the concept-car concept. When you go to an auto show andFordis showing anamphibious car that can fly and make you a latte,some of this Domino's technology,even as goofy as when they were delivering you pizzas viareindeer,it's just to get attention, butaspects of it are going to come out. I don't see a world in the near future whereautonomous pizza delivery cars are going to make a lot of sense in most markets. But,automating more of that process. There's no reason a man needs to take the glob of dough andput it into the pizza thing. That could absolutely be a machine that does that. So, you'regoing to see more and more of that. Andthat will make the process more efficient. And yeah,maybe in Manhattan, there'sgoing to be drones and robots. In very densely populated places, you'll see that. But I think a lot of that now is attention-gettinggimmicks. Domino's does not really intent --it's not cost effective to have a drone deliver me a small Cokeand a medium pizza.

Shen:So, last point here, you mentioned on the service side,having that human element be a differentiator, and how the next steps,it seems like right now, the ordering process is becoming automated. But with the food prep, it's still a challenge.I do want to bring up one example that shows that we are there,and it's just a matter ofreaching that mass scale. There's a company I found calledMomentum Machines, based in the West Coast, they garnered some buzzlast year in advance ofopening a restaurant with a robot that could flip 400 burgers an hour,cut your vegetables, and do quite a bit of that process,in terms of the burger prep. So,it really seems likeso many things right now are in the concept stage,and you'll get all these elements of itkind of like how you described, but for these trendswe talked about today, in terms of the competition, some of thediscountingissues thatthe industry faces,but also on the flip side, howthey're trying to tackle increasing costs andthings like that. It's really funny,how all this comes together.

Kline:It'sa question of cost. If you look at how McDonald's makes aMcCafebeverage versus how Starbucks does itversus how a local place does it,Starbucks is a little automated,McDonald's is basically push button, there's no barista,it's the same guy who makes your fries, makes your latte orespresso or whatever it is. But there's very few restaurant chains that canget to this quickly. So, if you are a McDonald's franchisee,and McDonald's comes to you and says, "Good news,you can eliminate 50% of your staff. Bad news, there's a $4 million investment toput in the automated burger machineand all of the other technology." So,this is going to be gradual. You're going to see,like I said before,maybe McDonald's, one of the more successful franchise models,might say to its franchisees "In 2018, you aregoing to automate making french fries and chicken McNuggets,and that's a $200,000 machine," orwhatever the number is. That's not going to fly atWendy'sorArby'sor any ofthe less successful, or aSubway, wherethe average franchise owner is making a nice salary, or if they'repaying a manager, they're making $40,000 to $50,000 inprofit. I'm sure some make more. They'renot going to be able to invest. So,this is going to happen,and I'm sure you're going to see some start-up money where it's a pizza place where there's no human,you put your money in and boop boopa robot makes you a pizza. Butit's not like, three years from now, you're going to go to the mallfood court and there won't be people there.

Shen:Yep,definitely lookingfarther out, for sure. Anything else that you would like to end on, in terms of, maybe, other trends that you're watching,things that aren't as prominent now but might be coming up down the line?

Kline:Yeah.I think there's going to be a lot of shake out. Wetalked about fast casual pizza,and I've written about fast casual burgers. There aregoing to be winners and losers in these spaces. There is absolutely room for aChipotle of pizzaand a Chipotle of burgers,and probably a number two and maybe even a number three company,but there's not room for 17. Andjust like we've seensome of the wannabe Chipotle knock-offs suffer,some of these companies are going to go away,or they're going to consolidate. You'realso seeing, in the step above that, in yourChili'sandRuby Tuesday, they'restruggling to find a business model. So,I think you're going to see a lot of restaurant closures. You saw a lot last year,whole chains going out of business. I think that'sgoing to continue, and maybe get worse.

Daniel Kline has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill, Ford, Panera Bread, and Starbucks. The Motley Fool is short Domino's Pizza and has the following options: short June 2017 $140 puts on Domino's Pizza. The Motley Fool recommends Coca-Cola. The Motley Fool has a disclosure policy.